The president of the European commission has warned China must stop dumping cheap steel in Europe or it could fail to gain market economy status with the World Trade Organisation, which Beijing is desperate to secure.

Jean-Claude Juncker said that Beijing and the EU had agreed to establish a working group to discuss the crisis in the steel industry and monitor steel shipments from China.

“The EU will defend its steel industry. We are not defenceless, and we will use all the means at our disposal,” Juncker said in Beijing after talks with the Chinese government.

China makes more than half of the world’s steel but is suffering from slowing domestic demand. In the first quarter of the year Chinese steel exports to the EU rose 28%, driving prices down by more than 30%.

Juncker said the steel industry in Europe faced a serious problem and added that China’s approach would determine whether it won market economy status, which would prevent strict tariffs being placed on its exports.

Juncker’s words will be welcomed by leaders in the UK steel industry, who are pressing the government and the EU to take action against Chinese steel.

However, it is ironic that they come after the UK voted to leave the EU . Leave campaigners heavily criticised the EU in the run-up to the referendum for failing to put tariffs on Chinese steel exports and not doing enough to help the industry.

Juncker said: “I do not want to dramatise this issue, although it could easily be dramatised. But for us there is a clear link between the steel overcapacity of China and the market economy status for China.”

The commission president said that he recognised the “painful” situation that China faces as it adjusts to overcapacity in its steel industry, which has forced it to export its steel cheaply. However, he said Europe had gone through a similar process in the 1970s and 80s that led to tens of thousands of jobs being lost.

“I know how painful this adjustment process can be and I have some understanding for the problems our Chinese friends are facing when it comes to the reduction of steel production in China, when it comes to the closing of steel plants,” he said.

“When we are saying that market rules have to apply: the Chinese know exactly that this, in concrete terms, means the closing down of steel plants.”

In a separate debate in Westminster on Wednesday, Anna Soubry, the business minister, said it was “absolutely critical” that the UK steel industry had free access to the European market despite a future Brexit.

She was responding to concerns from MPs that the referendum could put further pressure on the British steel industry. Stephen Doughty, the Labour MP for Cardiff South and Penarth, warned the government needed to offer “categorical assurances and actions” to protect jobs in the sector.